Estate of Hon Hing Fung, Bernard Fung v. Commissioner

117 T.C. No. 21

UNITED STATES TAX COURT

ESTATE OF HON HING FUNG, DECEASED, BERNARD FUNG, EXECUTOR,
Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 2173-00. Filed December 10, 2001.

D, a nonresident alien for U.S. tax purposes,
possessed at the time of his death interests in certain
properties located in the State of California. D’s
interests in two of these parcels, one of which was
subject to a promissory note secured by a deed of
trust, were contained in his residuary estate. D’s
will provided for his surviving spouse to receive a
three-eighths fractional interest in his residuary
estate, with the remaining five-eighths going to his
sons. In accordance with an agreement executed by the
residuary beneficiaries, the two California properties
were distributed to D’s surviving spouse while the
foreign residuary assets were distributed to D’s sons.

Held: The full value of D’s interest in the
encumbered residuary property, rather than the net
equity value thereof, must be included in his gross
estate.
 - 2 -

Held, further, the estate has failed to establish
its entitlement to a marital deduction in excess of
that allowed by respondent.

Robert B. Martin, Jr., for petitioner.

Ric D. Hulshoff, for respondent.

OPINION

NIMS, Judge: Respondent determined a Federal estate tax

deficiency in the amount of $144,980 with respect to the estate

of Hon Hing Fung (the estate). The issues for decision are:

(1) Whether a one-half interest owned by Hon Hing Fung

(decedent) in certain real property must be included in his gross

estate at its full value of $442,500, or whether the property may

be included at its net equity value after reduction for an

encumbrance in the amount of $324,974; and

(2) whether the estate is entitled to a marital deduction in

excess of that allowed by respondent.

Unless otherwise indicated, all section references are to

sections of the Internal Revenue Code in effect as of the date of

decedent’s death, and all Rule references are to the Tax Court

Rules of Practice and Procedure.

Background

This case was submitted fully stipulated pursuant to Rule

122, and the facts are so found. The stipulations of the
 - 3 -

parties, with accompanying exhibits, are incorporated herein by

this reference. Decedent was a citizen of Hong Kong, legally

resident in Kowloon, Hong Kong, when he died testate in the

Commonwealth of Massachusetts on September 5, 1995. At all

relevant times, decedent was a nonresident alien for U.S. tax

purposes. Decedent was survived by his wife, Fung Wong Tuen Wang

(also known as Norah Fung), likewise a nonresident alien for U.S.

tax purposes, and by his five sons. The executor of decedent’s

estate, Bernard Fung, maintained his principal residence in the

State of California at the time the petition in this case was

filed.

At decedent’s date of death, he possessed ownership

interests in three parcels of real property located in the United

States. Pursuant to community property principles, decedent and

his wife each owned a one-half interest in: (1) 287 Monte Vista

Avenue in Oakland, California, consisting of real property

improved with a 3-story, 20-unit residential building; and (2)

16597 Calle Victoria in Pacific Palisades, California, consisting

of unimproved land. A third parcel, located at 68 Vernon Street

in Oakland, California, and consisting of real property improved

with a 3-story, 10-unit residential building, was held by

decedent and his wife as joint tenants.

In connection with the Monte Vista property, a promissory

note dated October 24, 1988, was executed by decedent and his
 - 4 -

wife as borrowers and by World Savings and Loan Association as

lender. The note was in the amount of $700,000 and was secured

by a deed of trust on the Monte Vista property. The note

specified that “Borrower, and each of them, and Borrower’s

successors, transferees and assigns shall be jointly and

severally, directly and primarily, liable for the amount of all

sums owing and to be owed hereon”. The note further provided the

following with regard to remedies upon default:

Upon the occurrence of any event of default under
this Note: (1) the entire unpaid principal balance,
any unpaid interest, and any other amounts owing under
this Note shall, at the option of the holder of this
Note and without notice or demand of any kind to
Borrower or any other person, immediately become due
and payable; and (2) the holder of this Note shall have
and may exercise any and all rights and remedies
available at law or in equity and also any and all
rights and remedies provided in the Deed of Trust.

The remedies of the holder of this Note, as
provided in this Note and in the Deed of Trust or any
other instrument securing this Note, shall be
cumulative and concurrent, and may be pursued
singularly, successively or together, at the sole
discretion of the holder of this Note, and may be
exercised as often as occasion therefor shall arise.
No act of omission or commission of the holder,
including specifically any failure to exercise any
right, remedy or recourse, shall be deemed to be a
waiver or release of any right, remedy or recourse,
such waiver or release to be effected only through a
written document executed by the holder. * * *

As of decedent’s date of death, the value of the Monte Vista

property was $885,000, and the unpaid balance on the note was
 - 5 -

$649,948.1 Thus, in accordance with community property

principles, decedent’s interest in the property had a value of

$442,500 and was encumbered to the extent of $324,974.

The Calle Victoria property was unencumbered at the time of

decedent’s death. The value of decedent’s interest therein,

again pursuant to community property principles, was $435,000.

The Vernon property had a value of $475,000 and was encumbered to

the extent of $277,257.

Decedent provided for the disposition of his property at

death by means of a will executed on September 27, 1988. The

will first appointed three of decedent’s sons as executors and

trustees of his will and directed that “this will shall be

construed according to the Laws of Hong Kong.” Then, after

making a series of specific bequests, the document dealt with

decedent’s residuary estate in the manner set forth below:

7. I give the residual and remainder of my estate
property and effects of whatsoever nature or kind and
wheresoever situate (including any property over which
I may have a general power of appointment or
disposition by will) to my trustees upon trust to sell

1
The parties stipulated that the total unpaid balance was
$649,958 and that the corresponding balance with respect to
decedent’s one-half interest was $324,974. Since one-half of
$649,958 equals $324,979, we conclude that an error was made in
the stipulation. The estate tax return shows the total
encumbrance as $649,946.67, one-half of which is $324,973.34, and
respondent used the amounts $324,973 and $324,974 in making
calculations which involved one-half of the note’s balance. We
therefore accept the stipulated value of $324,974 as representing
one-half of the encumbrance and assume that the parties intended
$649,948 when referring to the full amount of the debt.
 - 6 -

call in and convert the same into money with power to
postpone such sale calling in and conversion for so
long as they shall in their absolute discretion think
fit without being liable for loss.

8. My trustees shall out of the monies to arise from
the sale calling in and conversion of or forming part
of my estate pay all my just debts funeral and
testamentary expenses and legacies and all estate duty
payable in respect of my estate * * *

9. Subject to the payment of all my just debts,
funeral and testamentary expenses, my trustees shall
hold my residuary estate property and effects of
whatsoever nature or kind and wheresoever situate upon
trust for the following beneficiaries who shall survive
me for a period of 30 days in manner hereinafter
following:-

(a) As to THREE (3) equal shares or parts thereof
to my wife the said FUNG WONG TUEN WAN * * *
for her own use and benefit absolutely.

(b) As to ONE (1) equal share or part thereof to
my son MICHAEL K.L. FUNG * * * for his own
use and benefit absolutely.

(c) As to ONE (1) equal share or part thereof to
my son the said ANTHONY K.T. FUNG * * * for
his own use and benefit absolutely.

(d) As to ONE (1) equal share or part thereof to
my son the said BERNARD K.K. FUNG * * * for
his own use and benefit absolutely.

(e) As to ONE (1) equal share or part thereof to
my son the said JOHN K.K. FUNG * * * for his
own use and benefit absolutely.

(f) As to ONE (1) equal share or part thereof to
my son the said EDMOND K.H. FUNG * * * for
his own use and benefit absolutely.

Decedent’s residuary estate included certain property

located in Hong Kong as well as the aforementioned Monte Vista

and Calle Victoria parcels in California.
 - 7 -

In the fall of 1996, documents were filed with the Superior

Court of the State of California, County of Los Angeles,

regarding the disposition of decedent’s property located in that

State. Decedent’s wife filed a SPOUSAL PROPERTY PETITION, and

later a SUPPLEMENT to such petition, requesting a “determination

of property passing to the surviving spouse without

administration” and a “confirmation of property belonging to the

surviving spouse”. In connection with this action, an AGREEMENT

ABOUT DISTRIBUTION OF DECEDENT’S ESTATE was filed with the

Superior Court. The agreement was executed by each of decedent’s

five sons in August of 1996 and recited that the residuary

beneficiaries

agree to allocate to Decedent’s spouse, FUNG WONG TUEN
WAN, also known as NORAH FUNG, as her 3/8ths share of
the Residue, all of Decedent’s right, title and
interest in the Real Property [defined as the Monte
Vista and Calle Victoria properties], and to allocate
to each of Decedent’s children as his 1/8th of the
Residue, 1/5th of that portion of the Residue located
in Hong Kong.

After an uncontested hearing, the Superior Court on December

3, 1996, issued an ORDER APPROVING SPOUSAL PROPERTY PETITION.

The order confirmed the passing of the Monte Vista and Calle

Victoria parcels to decedent’s surviving spouse and her ownership

thereof. On the following day, December 4, 1996, decedent’s wife

transferred the interest formerly owned by decedent that she

received in these properties, as well as the Vernon parcel, to

the Norah Fung Qualified Domestic Trust. The parties have
 - 8 -

stipulated that the trust was, at the time of its establishment

on December 4, 1996, a “qualified domestic trust” under the

applicable provisions of section 2056A.

In addition, the parties have further stipulated that as of

October 22, 1996, all estate duty payable to the Hong Kong

Government, if any, and all debts, liabilities, funeral expenses,

and testamentary expenses with respect to decedent’s estate in

Hong Kong had been provided for or paid. Accordingly, as of

October 22, 1996, the residual beneficiaries were entitled under

Hong Kong law to their respective shares in the residuary estate

absolutely and could demand distribution thereof.

A Form 706-NA, United States Estate (and Generation-Skipping

Transfer) Tax Return, Estate of nonresident not a citizen of the

United States, was timely filed with respect to decedent’s estate

on December 5, 1996.2 The notice of deficiency on which this

litigation is based was subsequently issued on November 30,

1999.3 Therein, respondent determined that the estate was not

entitled to report decedent’s interest in the Monte Vista real

property at its net equity value for gross estate purposes and

that the marital deduction claimed by the estate should be

reduced.

2
App. A sets forth the calculations shown on the estate tax
return.
3
App. B describes respondent’s computations, to the extent
ascertainable from the notice of deficiency.
 - 9 -

Discussion

I. General Rules

A. Estate Tax Principles

As a general rule, the Internal Revenue Code imposes a

Federal tax “on the transfer of the taxable estate (determined as

provided in section 2106) of every decedent nonresident not a

citizen of the United States.” Sec. 2101(a). Such taxable

estate, in turn, is defined in section 2106(a) as “the value of

that part of * * * [a decedent’s] gross estate which at the time

of his death is situated in the United States”, less applicable

deductions. Section 2103 then specifies that the gross estate of

a nonresident alien “shall be that part of his gross estate

(determined as provided in section 2031) which at the time of his

death is situated in the United States.” Hence, the gross estate

of a nonresident alien comprises “all property, real or personal,

tangible or intangible”, to the extent provided in sections 2033

through 2045, so long as that property is located in the United

States. Secs. 2031(a), 2103. Section 2033 broadly states that

“The value of the gross estate shall include the value of all

property to the extent of the interest therein of the decedent at

the time of his death.”

As regards the deductions permitted to nonresident aliens,

section 2106(a)(1) provides for allowance of that proportion of

the deductions specified in section 2053, relating to expenses,
 - 10 -

indebtedness, and taxes, “which the value of such part [i.e., the

part of the decedent’s gross estate which at the time of his

death is situated in the United States] bears to the value of his

entire gross estate, wherever situated.” If the surviving spouse

is not a citizen of the United States, a marital deduction

pursuant to section 2056 is allowed only where the subject

property passes or is treated as passing to the surviving spouse

in a qualified domestic trust. Sec. 2056(d)(1) and (2). The

parties here do not dispute that the technical criteria relating

to a qualified domestic trust will be considered satisfied so

long as other substantive requirements for the marital deduction

are met.

B. Burden of Proof

In general, the Commissioner’s determinations are presumed

correct, and the taxpayer bears the burden of proving otherwise.

Rule 142(a). Although recently enacted section 7491 may operate

in specified circumstances to place the burden on the

Commissioner, the statute is effective only for court proceedings

that arise in connection with examinations commencing after July

22, 1998. Internal Revenue Restructuring & Reform Act of 1998,

Pub. L. 105-206, sec. 3001(c), 112 Stat. 727. Since the record

here is devoid of evidence showing that the underlying

examination began after the relevant date, and since the estate
 - 11 -

has at no time contended that the provisions of section 7491 are

applicable, we conclude that the traditional burden remains upon

the estate.

II. Treatment of Monte Vista Property for Gross Estate Purposes

The parties in this case differ as to the treatment for

gross estate purposes of decedent’s interest in the Monte Vista

property. The estate contends that the parcel should be included

in the gross estate at its net equity value, after offsetting the

portion of the indebtedness considered to burden decedent’s one-

half interest in the property. Respondent, in contrast, takes

the position that decedent’s interest in the parcel must be

included in the gross estate at its full fair market value, with

the associated indebtedness being allowed as a deduction only to

the extent provided in sections 2106(a)(1) and 2053.

Section 2053(a)(4) specifies that deductions allowable in

computing the taxable estate include amounts “for unpaid

mortgages on, or any indebtedness in respect of, property where

the value of the decedent’s interest therein, undiminished by

such mortgage or indebtedness, is included in the value of the

gross estate”. Regulations promulgated under this section

further explain:

A deduction is allowed from a decedent’s gross
estate of the full unpaid amount of a mortgage upon, or
of any other indebtedness in respect of, any property
of the gross estate, including interest which had
accrued thereon to the date of death, provided the
value of the property, undiminished by the amount of
 - 12 -

the mortgage or indebtedness, is included in the value
of the gross estate. If the decedent’s estate is
liable for the amount of the mortgage or indebtedness,
the full value of the property subject to the mortgage
or indebtedness must be included as part of the value
of the gross estate; the amount of the mortgage or
indebtedness being in such case allowed as a deduction.
But if the decedent’s estate is not so liable, only the
value of the equity of redemption (or the value of the
property, less the mortgage or indebtedness) need be
returned as part of the value of the gross estate. * *
* [Sec. 20.2053-7, Estate Tax Regs.]

The validity of this regulation, and its applicability to

the estate of a nonresident alien, has long been established. In

the words of this Court in Estate of Johnstone v. Commissioner,

19 T.C. 44, 46 (1952):

If a particular debt can be collected only from
property mortgaged to secure the debt and not from the
estate generally, the full amount of the debt should be
excluded even in the case of a nonresident alien, but
if it can be collected from the estate generally, and a
part of that estate is not being taxed in the United
States, then it is appropriate to allow only a
proportionate part of the debt to be deducted. * * *

Both parties appeal to the above-quoted regulation in

support of their respective positions. Respondent maintains that

because decedent was personally liable for the indebtedness at

issue by the terms of the promissory note, the full value of his

interest in the Monte Vista property must be returned as part of

the gross estate. The estate, on the other hand, does not

specifically deny that decedent was legally liable for the debt

evidenced by the promissory note. Rather, the estate argues that

“the Petitioner had no realistic personal liability for the debt
 - 13 -

on the Monte Vista Property” and that “The mere possibility that

a lender might have made a claim against the estate on the Monte

Vista note is insufficient to conclude that the estate was

personally liable for the obligation.”

The estate’s argument rests on the provisions governing

deeds of trust under California law, specifically that contained

in Cal. Civ. Proc. Code sec. 580d (West 1976 & Supp. 1995). The

statute reads, in pertinent part:

No judgment shall be rendered for any deficiency
upon a note secured by a deed of trust or mortgage upon
real property or an estate for years therein hereafter
executed in any case in which the real property or
estate for years therein has been sold by the mortgagee
or trustee under power of sale contained in the
mortgage or deed of trust. [Id.]

The effect of such section is to prevent a lender who

chooses to foreclose on a deed of trust by means of a nonjudicial

sale, under the power of sale contained in the trust instrument,

from thereafter seeking a deficiency judgment against the debtor.

Cornelison v. Kornbluth, 542 P.2d 981, 989-990 (Cal. 1975). At

the same time, however, the Supreme Court of California has also

made clear that a nonjudicial sale is not the only enforcement

remedy available to the lender holding a deed of trust:

‘It seems clear that section 580d was enacted to put
judicial enforcement on a parity with private
enforcement. This result could be accomplished by
giving the debtor a right to redeem after a sale under
the power. The right to redeem, like proscription of a
deficiency judgment, has the effect of making the
security satisfy a realistic share of the debt. * * *
By choosing instead to bar a deficiency judgment after
 - 14 -

private sale, the Legislature achieved its purpose
without denying the creditor his election of remedies.
If the creditor wishes a deficiency judgment, his sale
is subject to statutory redemption rights. If he
wishes a sale resulting in nonredeemable title, he must
[forgo] the right to a deficiency judgment. In either
case the debtor is protected.’ [Id. at 990 (quoting
Reseleaf Corp. v. Chierighino, 378 P.2d 97, 102 (Cal.
1963)).]

Hence, the statute does not eradicate the possibility of personal

liability.

Nonetheless, the estate avers that “It is the near universal

practice in California to foreclose on a deed of trust through a

nonjudicial foreclosure under the power of sale” and that such

would be particularly appropriate in the case of property held by

the estate of a nonresident alien. From this proposition, the

estate concludes that “this entirely theoretical liability” does

not render the estate personally liable within the meaning of

section 20.2053-7, Estate Tax Regs. The estate also argues that

its position is supported by caselaw allegedly holding, in the

estate’s words, that “a secondary or remote possibility that an

estate might have personal liability for the amount of the

mortgage was not enough to establish it as a claim against the

estate under section 2053(a)(3).”

We disagree with the estate’s contention that “a practical

approach is mandated” in resolving the question at issue. As a

threshold matter, we note that the standard applied under section

2053(a)(3), relating to claims against the estate, is not
 - 15 -

controlling where, as here, we are dealing with mortgage

indebtedness under section 2053(a)(4). (Respondent cites only

section 2053(a)(4) in support of the Government’s position on

inclusion.) Moreover, while we pointed out in Estate of Theis v.

Commissioner, 81 T.C. 741, 749-750 (1983), affd. 770 F.2d 981

(11th Cir. 1985), that section 2053(a)(4) was not intended to

apply where the decedent was only secondarily liable or an

accommodation party, we went on to state that “Section 20.2053-7,

Estate Tax Regs., like section 2053(a)(4), was intended to cover

situations involving the liability for mortgages on a decedent’s

own property.” Thus, Estate of Theis v. Commissioner, supra,

hardly stands for the principle that practicalities should

override legal liability where a decedent is the named primary

obligor, on an explicitly recourse note, encumbering his or her

own fee interest in a parcel, particularly where the transaction

involved no third parties whom the decedent might have been

accommodating.

Furthermore, this Court has previously embraced the notion

that potential liability can be sufficient for purposes of

section 20.2053-7, Estate Tax Regs., in a case somewhat analogous

to that now before the Court. In Estate of Linderoth v.

Commissioner, T.C. Memo. 1986-547, a residence was encumbered by

deeds of trust securing promissory notes. The property was

located in Nevada, where a statutory “one action rule” could
 - 16 -

operate to restrict the remedies available to a lender. Id. The

taxpayer argued that since the value of the residence exceeded

the amount of the debt, the estate would not be liable for the

encumbrances under the one action rule. Id. The Commissioner,

on the other hand, contended “that the estate is at least

potentially liable on the encumbrances, and therefore, the full

value of decedent’s interest in the residence is includable in

the gross estate”. Id. We held for the Commissioner. Id.

Given the foregoing, we are unable to agree with the estate

that decedent’s express legal liability on his own interest in

the disputed property may be disregarded in applying section

20.2053-7, Estate Tax Regs. Both the subject promissory note and

State law afforded the lender a choice of remedies, one of which

included the imposition of personal liability. Yet the estate

asks us to eliminate one of those alternatives on mere

generalities and assumptions regarding creditor preference. We

decline to do so. We hold that the full value of decedent’s

interest in the Monte Vista property must be included as part of

his gross estate, with a corresponding deduction allowed to the

extent permitted by the Internal Revenue Code.

III. Extent of Entitlement to Marital Deduction

Section 2056(a) authorizes a deduction from the gross estate

of “an amount equal to the value of any interest in property

which passes or has passed from the decedent to his surviving
 - 17 -

spouse”. The parties in this case disagree as to the proportion

of the California real estate contained in decedent’s residuary

estate which should be considered to have passed from him to his

surviving spouse for purposes of the section 2056 deduction, and

we note that this appears to be a matter of first impression.

Following execution of a distribution agreement by

decedent’s residuary beneficiaries and in accordance with an

order by the California Superior Court, decedent’s wife received

decedent’s one-half interest in both the Monte Vista property and

the Calle Victoria property. Regulations promulgated under

section 2056 provide as follows with regard to will contests and

other assignments or surrenders of property in the context of the

marital deduction:

If as a result of the controversy involving the
decedent’s will, or involving any bequest or devise
thereunder, a property interest is assigned or
surrendered to the surviving spouse, the interest so
acquired will be regarded as having “passed from the
decedent to his surviving spouse” only if the
assignment or surrender was a bona fide recognition of
enforceable rights of the surviving spouse in the
decedent’s estate. Such a bona fide recognition will
be presumed where the assignment or surrender was
pursuant to a decision of a local court upon the merits
in an adversary proceeding following a genuine and
active contest. However, such a decree will be
accepted only to the extent that the court passed upon
the facts upon which deductibility of the property
interests depends. If the assignment or surrender was
pursuant to a decree rendered by consent, or pursuant
to an agreement not to contest the will or not to
probate the will, it will not necessarily be accepted
as a bona fide evaluation of the rights of the spouse.
[Sec. 20.2056(c)-2(d)(2), Estate Tax Regs.]
 - 18 -

In construing this regulation, courts have explained that

“the ‘test’ of whether assets pass from the decedent for estate

tax purposes is ‘whether the interest reaches the spouse pursuant

to state law, correctly interpreted--not whether it reached the

spouse as a result of good faith, adversary confrontation.’”

Estate of Carpenter v. Commissioner, 52 F.3d 1266, 1273 (4th Cir.

1995) (quoting Ahmanson Found. v. United States, 674 F.2d 761,

774 (9th Cir. 1981)), affg. T.C. Memo. 1994-108. A settlement

must be based on valid, enforceable rights under the will and

State law at the time the settlement was reached in order for

property received thereunder to qualify for the marital

deduction. Id.; see also Estate of Hubert v. Commissioner, 101

T.C. 314, 319 (1993), affd. 63 F.3d 1083 (11th Cir. 1995), affd.

520 U.S. 93 (1997). The principle just enunciated is a corollary

to the general rule that “Qualification for the marital deduction

must be determined as of the time of * * * death.” First Natl.

Exch. Bank v. United States, 335 F.2d 91, 92 (4th Cir. 1964).

Accordingly, in situations such as that now before the Court,

“the proper focus is on the rights a widow received under the

terms of the testamentary * * * [instrument], not on any

subsequent rights she may have received from the settlement

agreement itself.” Estate of Carpenter v. Commissioner, supra at

1273.
 - 19 -

In light of the foregoing, the estate contends a marital

deduction is allowable for the full value of decedent’s interest

in the California property received by the surviving spouse,

while respondent maintains that only three-eighths of the value

of decedent’s interest in the Monte Vista and Calle Victoria

parcels may be considered in computing the deduction.

More specifically, the estate’s position is that “The U.S.

property received by the surviving spouse was in bona fide

recognition of her rights to 3/8ths of the entire residue of

decedent’s estate and therefore passed from the decedent.”

Respondent, in contrast, interprets the language of the will as

granting to the surviving spouse only an undivided three-eighths

interest in each residuary asset. Thus, as framed by the

parties, the dispute turns on what rights in the residuary pool

were afforded to decedent’s wife by the terms of his will and

Hong Kong law.

However, we need not address this challenging question of

will construction. Even if we were to assume for the sake of

argument that the fractional share legacy set forth in decedent’s

will could be construed as a right to three-eighths of the
 - 20 -

residue as a whole,4 the estate has failed to prove the amount of

the allowable deduction. See Rule 122(b). The estate at no time

offered evidence to establish the value of the foreign residuary

assets. The sole allegation regarding a specific dollar figure

for the foreign residue appears to be a statement in the

uncontested distribution agreement filed by decedent’s

beneficiaries in connection with the California spousal property

petition, wherein it is recited that “The residue consists of

certain property located in Hong Kong having an estimated value

of U.S. $600,000.” Such statement is by its very terms an

estimate or approximation and falls short of constituting

reliable proof. In addition, although both parties seem to have

accepted $729,339 as the value of the foreign gross estate, they

have not identified the portion of that amount which was

administered under the residuary clause of decedent’s will. A

similar shortcoming adheres with respect to the assets lists

accompanying the Hong Kong CERTIFICATE OF EXEMPTION FROM ESTATE

DUTY, which, while included as part of the record, have been

offered without further explanation of the relationship, if any,

of the enumerated items to the provisions of decedent’s will.

4
It is by no means certain that this argument would
prevail. See discussions by the following well-known
commentators: 4 Casner, Estate Planning, sec. 13.5.2, at 87 (5th
ed. 1988); Manning et al., Manning on Estate Planning, sec. 2.7,
at 2-31 (5th ed. 2001); Covey, The Marital Deduction and the Use
of Formula Provisions, 95 (2d ed. 1978).
 - 21 -

Accordingly, we have no means by which to ascertain that the

deduction claimed for the parcels received by the spouse under

the distribution agreement did not exceed three-eighths of the

total value of the residue.

Thus, because the estate has failed to carry its burden of

proof with regard to the facts necessary to sustain its own

substantive legal argument, we need not decide whether such

approach is sustainable under the law. We simply hold that the

estate has failed to prove that it is entitled to a marital

deduction greater than that allowed by respondent.

To reflect the foregoing,

Decision will be entered

for respondent.
 - 22 -

Appendix A

The Estate’s Calculations As Per Return (Rounded)

Gross Estate

Monte Vista:

Appraised value $885,000
Less: Encumbrances (649,947)
1
Net equity value 237,053
Less: One-half interest (118,527)
Gross estate value $118,526

Calle Victoria:

Appraised value 870,000
Less: One-half interest (435,000)
Gross estate value 435,000

Vernon:

Appraised value 475,000
Less: Encumbrances (277,257)
Gross estate value 197,743

GROSS ESTATE IN UNITED STATES 751,269

GROSS ESTATE OUTSIDE UNITED STATES 729,339

TOTAL GROSS ESTATE 1,480,608

1
$885,000 minus $649,947 equals $235,053, one-half of which
would be $117,527 (rounded), but it appears a mathematical error
was made on the return.
 - 23 -

Deductions

Expenses, claims, etc.
2
amount claimed $50,081

Marital deduction
Value of property passing to surviving spouse
Monte Vista $118,526
Calle Victoria 435,000
Vernon 197,743
Available amount $751,269

Less: Deduction claimed for
expenses/claims (50,081)

Claimed marital deduction 701,188

TOTAL DEDUCTIONS CLAIMED 751,269

Taxable Estate

Gross estate in United States 751,269
Less: Deductions (751,269)

TAXABLE ESTATE - 0 -

2
This amount should equal the percentage of total
expenses/claims which corresponds to the ratio of value of the
gross estate in the United States to total gross estate value.
Again, however, there appears to be a mathematical discrepancy as
the total expenses/claims are shown to be $97,404 on the return.
 - 24 -

Appendix B

Respondent’s Calculations As Per Notice of Deficiency

Gross Estate

Monte Vista:

Appraised value $885,000
Less: One-half interest (442,500)
Gross estate value $442,500

Calle Victoria:

Appraised value 870,000
Less: One-half interest (435,000)
Gross estate value 435,000

Vernon:

Appraised value 475,000
Less: Encumbrances (277,257)
Gross estate value 197,743

GROSS ESTATE IN UNITED STATES 1,075,243

GROSS ESTATE OUTSIDE UNITED STATES 729,339

TOTAL GROSS ESTATE 1,804,582
 - 25 -

Deductions

Expenses, claims, etc.
1
amount allowed $258,944

Marital deduction
Available amount attributable to each item of U.S. property
passing to surviving spouse
2
Monte Vista $166,313
3
Calle Victoria 163,125
4
Vernon 197,743
Total $527,181

Less: Three-eighths share of
taxes, debts, and expenses
payable out of the residue (217,293)

Allowed marital deduction 309,888

TOTAL DEDUCTIONS ALLOWED 568,832

Taxable Estate

Gross estate in United States 1,075,243
Less: Deductions (568,832)
5
TAXABLE ESTATE 506,412

1
This amount takes into account one-half of the unpaid
balance on the Monte Vista mortgage, or $324,973, reduced in
accordance with the ratio of U.S. to total gross estate value.
2
It appears that this amount was likely intended to equal
three-eighths of the value of decedent’s one-half interest in the
parcel ($442,500 x .375 = $165,938 (rounded)). The mathematical
discrepancy is not explained.
3
This amount equals three-eighths of the value of
decedent’s one-half interest in the parcel ($435,000 x .375 =
$163,125).
4
This amount equals the full gross estate value of
decedent’s interest in the parcel. It would appear that no five-
eighths reduction was applied because the property passed to the
surviving spouse pursuant to the joint tenancy form of ownership,
as opposed to under the residuary clause of decedent’s will.
5
The $1 discrepancy ($1,075,243 - $568,832 = $506,411) is
not explained and presumably results from rounding.